Africa’s SEZ drive requires more than just words

In Eldoret, an inland city in Kenya, hundreds of kilometers northwest of the famed seaport of Mombasa, Kenya DL Group is cooperating with China-based Guangdong New South Group to build a special economic zone (SEZ) named after China’s Pearl River Delta.

In recent years, many African countries have shown a keen interest in copying the experience of China’s SEZs, but the efforts needed in those countries involve more than just giving a Chinese name to a new zone.

China’s meteoric rise as “the world’s factory” can be traced back to 1979 when the country launched its first export-oriented economic development zone in Shekou, part of Nanshan district in Shenzhen, South China’s Guangdong Province. With preferential policies such as tax breaks and exemptions, tariff concessions and favorable measures for foreign companies, SEZs have played a key role in helping China attract foreign investment and become part of the global industrial value chain.

It is uncertain whether Africa’s enthusiasm for SEZs will help the continent repeat the success of China, but it is worth a try. What we worry about is that the ideas that many officials in African countries have may be too simplistic. Some local authorities think that SEZs can be established just by signing an agreement, providing some land and announcing preferential measures.

The following points are often overlooked by African countries as they try to copy the experience of China’s SEZs. First, most SEZs in China are located in coastal regions, making them convenient for seaborne trade. Because they are near sea routes, enterprises in SEZs can rely on raw material imports and re-exports of the manufactured goods. This business model can help companies avoid the problems caused by an undeveloped industry chain and low domestic consumption.

By relying on overseas sales in mature markets like the US and EU, transnational enterprises can make a profit in a short time after they invest in developing countries’ SEZs. Processing or assembly by companies in SEZs is only a small part of the global value chains that include activities like research and development. But this work still creates employment and contributes to the tax base in the relevant countries. So, there is a win-win scenario for the transnational companies in the SEZs and the local country.

Kenya has promised measures to boost the country’s investment profile. This is worthy of attention and praise. However, setting up its SEZ in an inland city that lies at an altitude of more than 2,000 meters will do little to make the SEZ a platform for the development of an export-oriented economy. That does not mean the SEZ will not have any successes, but it’s obvious there are differences between SEZs in Kenya and in China.

Second, I have visited many SEZs in Africa, and I found that most of them were co-founded by Chinese State-owned or private companies. Some local governments in Africa think their role in the development of SEZs is merely to offer preferential policies, and the work of building infrastructure facilities in the SEZs should be undertaken by enterprises, which can recoup their investment after the SEZs start operating.

However, some SEZs are hurt by backward infrastructure because of their developers’ limited financial resources, so they have difficulty in attracting manufacturers. This causes the developers’ financial situation to further deteriorate and leads to a downward spiral.

African governments should cooperate with enterprises to build SEZs by taking a correct stance, rather than providing them with a cash cow. Africa can learn from China’s experience in building SEZs. In 1994, China and Singapore jointly established the Suzhou Industrial Park. The Chinese side did more than offer preferential measures. The Suzhou municipal government also undertook the infrastructure work, including landscape management and providing water and electricity, all of which greatly promoted the zone’s development.

Third, China’s establishment of SEZs to develop manufacturing relied on its huge demographic dividend. In recent decades, China set up a many vocational schools that trained numerous skilled workers. The cost of this labor development was borne by the educational investment of the Chinese government instead of enterprises in the SEZs.

Generally, African workers have low technical skills, and training them after recruitment drives up labor costs. African countries may consider increasing investment in education to cultivate a stable workforce and solve the problem of recruitment in the SEZs. Each year, China gives African countries substantial financial assistance to support poverty alleviation and economic development.

Both sides can use this economic assistance to support local educational systems and vocational schools. These schools could train workers with the specific skills required by companies in particular SEZs. For example, if there is a textile enterprise in an SEZ, textile-related courses can be offered in nearby training schools. Africa’s “special economic zone” drive is expected to promote Sino-African cooperation. So if China’s SEZs experience can be replicated in Africa, it will be a great chance for Africa to reproduce the miracle of China’s industrial development.